Kudlow: No Sequester Catastrophe

President Obama may be backing away from his doomsday spending-cut predictions as the sequester goes into place. But the new party line is that while there will be no impact in the first few days, there’ll be a slow, downward slump after that.

What, are we to believe that lower spending and smaller government damage the economy? Doesn’t that run counter to virtually every reasonably objective study in recent years — including ones from a number of U.S. academics and the Organization for Economic Cooperation and Development in Europe — that describe how countries with lower government spending grow more, and how countries with higher government spending grow less?

However you calculate the sequester spending cuts, and however uneven they may be, the reality is that the sequester at least moves the ball in the right direction. I maintain that by reducing the government spending share of gross domestic product, the sequester is pro-growth.

The White House and the Congressional Budget Office are predicting a 0.5 percent to 0.7 percent decline in GDP, post-sequester, and a loss of 750,000 jobs. All this from a spending reduction of roughly 2.4 percent over the next 10 years, in which Uncle Sam’s spending growth will be $44.8 trillion rather than $46 trillion.

Fed chairman Ben Bernanke and other demand-siders have called for a slow, gradual federal-spending reduction. Well, that’s exactly what they’re going to get. The first fiscal year of sequester will see $44 billion in spending cuts, which is about one quarter of 1 percent of GDP. That’s pretty gradual.
If it isn’t, you’re telling me there’s never a good time to cut spending. Nonsense.

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And compare that $44 billion 2013 spending cut (most of which is slower baseline growth, not a cut in spending levels) to a roughly $150 billion 2013 tax hike. Hmm, let me get this right: It’s OK to raise taxes, because that won’t hurt the economy, but it’s not OK to cut spending, because that will lower output?

Doesn’t make any common sense.

Let’s not forget that in recent years, there isn’t a U.S. business large or small that hasn’t had to undergo major belt-tightening. But where’s the federal government belt-tightening? Federal civilian employment has increased substantially during this period. And while the business sector has survived to become highly profitable, the federal sector has become bloated, edging ever closer to debt bankruptcy.

Oh, regarding Team Obama’s doom-and-gloom economic forecast, hearken back to 2009, when the White House economic gurus predicted 3 to 4 percent real economic growth in recovery, with unemployment dropping below 6 percent. That, presumably, would have been driven by a roughly $1 trillion spending increase. But instead we got the weakest recovery in modern times going back to 1947 — an anemic 2 percent economy and unemployment just a shade below 8 percent. The trillion-dollar stimulus never panned out.

If Keynesian spending was going to work, it would have already worked.

So maybe we should try something new. Let’s lower spending and free up resources for the innovative private sector, and then let’s see if the results are better. I’m betting, as did deceased Nobel-prize winners Milton Friedman, Friedrich Hayek, and James Buchanan, that as the government sector shrinks, private economic growth expands.

It’s not as though the sequester abolishes public spending. Investor’s Business Daily points out that transportation, education, housing, community development, natural resources, farm subsidies and general government have all increased by 25 to 40 percent in recent years. Therefore, you could say sequester is nothing more than a return to normalcy.

And let’s not forget that while budget authority declines by $85 billion for one year, Ben Bernanke’s Fed is pouring $85 billion a month of new money creation (over $1 trillion a year) into the economy. Let’s also not forget that the stock market has been going up, not down.

JPMorgan economist Jim Glassman reminds us that a revived housing sector, the energy boom, a rebound in business investment and a renewal of manufacturing activity all will bolster the economy in the period ahead. Monetary conditions, he says, “remain highly stimulative.” (Hat tip: Jim Pethokoukis).

No, I’m not making the case that the spending-cut sequester is going to immediately launch an economic boom. But I do believe it will help economic recovery over time. (Congress could help, too, by passing pro-growth corporate tax reform that lowers marginal rates and eliminates cronyist tax loopholes for both large and small businesses. That would be a real economic booster shot.)

So the Republicans are right to stick to their guns on budget cuts. And if President Obama expects to point his finger at the GOP for an economic-sequester catastrophe, he’s going to be mistaken.